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No buts, stock picking is the key for Brunner Investment Trust

“A global focus allows for higher potential returns, more diversification and greater scope for management outperformance than a regional focus solely.”

The Brunner Investment Trust -
The US giant is the largest of around 60 holdings

 

Even with the advent of online trading, collective investments remain the best way for most UK investors who want to put money into the world’s largest companies.

Online platforms have undoubtedly made it easier but buying shares in overseas companies requires a serious commitment in terms of research, information sources and (often) dealing costs.

A far simpler way is to invest in specialist trust or fund and if it is a portfolio of the world’s largest companies you want, Brunner Investment Trust (LON:BUT) fits the bill.

Brunner has been around a long time and is a balanced fund focusing on income allied to capital growth.

Formed in 1929 by the Brunner family (who still own a 29% stake), the trust is now managed by Lucy Macdonald, the head of global equity investment at German giant Allianz, the trust’s manager.

Macdonald took over full management of the trust in 2016 when its two discrete portfolios were merged.

Since then, there has been a shift in style with the emphasis now less UK-centric and more global.

As the trust’s shareholder base is in the UK, the need to pay dividends in sterling will always mean a sizeable amount is invested companies based here, but the proportion has reduced from 50% in 2016 to about 25% currently.

Shift of style

Macdonald believes that if you want good returns and income from large companies you have to look further afield.

“A global focus allows for higher potential returns, more diversification and greater scope for management outperformance than a regional focus solely.”

US software giant Microsoft is the largest holding and is a good example of how the investment philosophy works.

Macdonald is a fan of Microsoft’s cloud computing arm Azure, which is one of the fastest-growing parts of the business but was relatively small when the trust first bought into the group over ten years ago.

Amazon and Google are the two other giants in the cloud space, but Microsoft is the only one that pays a dividend.

“We bought before Satya Nadella became chief executive and when the cloud was only a tiny part.”

Since 2010, Microsoft’s value has risen by more than 500% and the business is now worth US$1.3trn.

Macdonald has trimmed her holding recently but only to keep a lid on its size in the portfolio.

“It’s not ridiculously over-priced, even now,” she says.

Global network

Microsoft helped Brunner put in a strong performance over the past year, but there were also good gains at US contact lens group Cooper and Taiwan Semiconductor.

Allianz’s global network helped put the trust onto Taiwan Semiconductor adds Macdonald, with the group’s analyst in Hong Kong saying it was cheap at this stage of the cycle and given the growth longer-term potential for computer chips.

The diverse nature of these businesses and their geographies underlines the strategy behind the portfolio, adds Macdonald, with active share selection at its heart.

“We are bottom-up stock pickers.” 

At around sixty companies, it is a concentrated portfolio and to make the cut companies must meet thresholds of growth, quality and value, though some of the stocks are held largely for the income they produce.

ESG (environment, social and governance) is also becoming increasingly important and companies failing in this regard and not showing any signs of improvement are unlikely to be considered going forward.

Shell, for example, is the only fossil fuel major in the portfolio with a holding in BP sold last year.

Brunner’s share price has been strong over the past twelve months reflecting the investment performance and a sharp narrowing of the discount to NAV to around 7%.

Balance sheet cleaned up

A restructuring of the balance sheet has helped in this regard, with two expensive debentures now replaced by a £30mln 25-year loan facility at 2.6%.

Brunner’s impressive dividend record has also done its bit especially as it has been enhanced even more over the past two years.

The trust is one of trade body the AIC’s ‘dividend heroes’, meaning it has raised the payout for twenty years consecutively.

In fact, Brunner has raised its dividend for 47 years on the trot with a notable 15% hike at the half-way point of the current year.

Macdonald is confident the rising dividend run will continue.

Last year’s payout was comfortably covered by income, she says, while the trust’s reserves cover more than one year’s worth of payments.

Macdonald expects the current year to see equity markets quieter than 2019, which will make it harder to match the 17% rise in net asset value between the end of the last financial year and yesterday’s close of play valuation of 988p.

A double-digit return would be doing well, she believes, but last year turned out better than expected at the outset and in any case, Brunner is about the stocks and individual non-market correlated ideas.

“In a flatter year, you have to get more active.”

At 910p, Brunner is valued at £432mln and yields 2%.

Quick facts: The Brunner Investment Trust

Price: 901.7999 GBX

LSE:BUT
Market: LSE
Market Cap: £385 m
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Brunner Investment Trust reports 13.2% rise in 2019 NAV and again ups its...

Brunner Investment Trust's (LON:BUT) Lucy Macdonald caught up with Proactive London's Andrew Scott to run through its 2019 numbers. BUT posted a 13.2% rise in net asset value (NAV) in the year to 945.8p and increased the dividend by 10.1% to 19.98p, which was fully covered by earnings of 21.7p

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